CNA Sees Q4 Net Loss of $217M

February 16, 2006

CNA Financial Corporation reported fourth quarter of 2005 results, which included the following items:

* Net loss for the fourth quarter of 2005 of $217 million as compared with net income of $303 million for the same period in 2004.
* Net operating loss from continuing operations for the fourth quarter of 2005 of $172 million as compared with net operating income from continuing operations of $200 million for the same period in 2004.
* Fourth quarter 2005 after-tax results were negatively impacted by a net loss of $223 million from commutations of significant finite reinsurance contracts and non-commutation related adverse net development of $139 million.
* Fourth quarter 2005 after-tax results were also negatively impacted by $37 million of catastrophes, primarily related to Hurricane Wilma.
* Property & Casualty Operations combined ratio for fourth quarter and full-year 2005 was 101.4% and 98.4%, before the 20.0 point and 11.6 point impact related to commutations and catastrophes.
* CNA will restate its financial statements for prior years to correct the accounting for businesses reported as discontinued operations. This restatement will be reflected in the company’s 2005 Form 10-K and will reduce stockholders’ equity as of Dec. 31, 2004 by $204 million, or 2.2%.

Net operating results from continuing operations for the three months ended Dec. 31, 2005 decreased $372 million as compared with the same period in 2004. The change in operating results from continuing operations was primarily due to a loss related to commutations of finite reinsurance contracts and unfavorable net prior year development.

The fourth quarter was also impacted by higher catastrophe losses and increased net investment income. The Property & Casualty Operations produced a combined ratio of 101.4%, before the 20.0 point impact of significant commutations and catastrophes, in the fourth quarter 2005. The Property & Casualty Operations produced a combined ratio of 96.5%, before the 0.5 point impact of catastrophes, for the same period in 2004.

Full-year net operating income from continuing operations was $346 million lower in 2005 as compared to 2004. This decrease in net operating income from continuing operations was primarily driven by increased unfavorable net prior year development, including the impact of commutations and increased catastrophe impacts in 2005. This was partially offset by an increase in net investment income, and a $115 million after-tax benefit related to a federal income tax settlement and release of federal income tax reserves.

The Property & Casualty Operations produced a combined ratio of 98.4% for the year ended Dec. 31, 2005 before the 11.6 point impact of catastrophes and significant commutations. For the year ended Dec. 31, 2004, Property & Casualty Operations produced a combined ratio of 96.9% before the 3.6 point impact of catastrophes and significant commutations.

During the fourth quarter of 2005, the company commuted several reinsurance contracts. The commutations reduced after-tax net operating results by $223 million, which consisted of net prior year development partially offset by the release of previously established allowance for uncollectible reinsurance. These contracts contained interest crediting charges. The interest expense associated with the reinsurance contracts commuted was $47 million after-tax and $86 million after-tax in 2005 and 2004. There will be no further interest crediting charges related to these commuted contracts in future periods.

“While our results for the quarter and the year were impacted by catastrophes, significant commutations and other prior year development, we remain pleased with the underlying performance of our core P&C Operations,” said Stephen Lilienthal, chairman and chief executive officer of CNA Financial Corporation. “The 2005 combined ratio of 98% before the impact of catastrophes and commutations reflects our focus on disciplined underwriting, claim excellence and expense management. Going forward, the earnings power of our business will be much more evident now that we have removed the drag of the commuted reinsurance contracts.”

The impact of catastrophes was $334 million after-tax in 2005 and $196 million after-tax in 2004. The 2005 catastrophe impacts primarily related to Hurricanes Katrina, Wilma, Rita, Dennis and Ophelia. The 2004 catastrophe impacts primarily related to Hurricanes Charley, Frances, Ivan and Jeanne. These impacts are net of anticipated reinsurance recoveries, and include the effect of reinstatement premiums and estimated insurance assessments.

The company recorded pretax unfavorable net prior year development of $591 million and $807 million for the fourth quarter and full-year 2005. Included in these amounts are $377 million and $433 million related to significant commutations. Net prior year development in the fourth quarter was also recorded related to the company’s assumed reinsurance operations which are in run-off, excess workers’ compensation lines, primarily in accident years 2003 and prior, and pollution exposures.

Net results for the three months ended Dec. 31, 2005 decreased $520 million compared with the same period in 2004. Net results were affected by the factors mentioned above, as well as a decline in net realized investment results and an increase in results from discontinued operations.

Net income for the year ended Dec. 31, 2005 decreased $161 million as compared with the same period in 2004, primarily due to decreased net operating income. This was partially offset by improved net realized investment results of $143 million and an increase in results from discontinued operations. The 2004 investment results included a $389 million loss on the sale of the individual life insurance business in 2004.

Standard Lines includes standard property and casualty coverages sold to small and middle market commercial businesses primarily through an independent agency distribution system. This business also includes excess and surplus lines, as well as insurance and risk management products sold to large corporations.

* Net written premiums decreased $32 million for the fourth quarter of 2005 as compared with the same period in 2004. Standard Lines retention improved to 81% while rates, on average, were flat during the fourth quarter of 2005.
* Net operating results decreased $180 million for the fourth quarter of 2005 as compared with the same period in 2004. The current quarter results were adversely affected by significant commutations, unfavorable non-commutation net prior year development and increased catastrophe impacts. Contributing positively to the current quarter results were increased net investment income and a decrease in the bad debt provision for insurance receivables. The fourth quarter 2004 net operating results included a $36 million bad debt provision for insurance receivables.
* Net results for the fourth quarter of 2005 decreased $287 million as compared with the same period in 2004. The decrease was primarily due to the factors mentioned above, as well as decreased net realized investment results.

Specialty Lines provides an array of professional, financial and specialty property and casualty products and services.

* Net written premiums increased $6 million for the fourth quarter of 2005 as compared with the same period in 2004. Specialty Lines retention improved to 87% while rates, on average, increased 1% during the fourth quarter of 2005.
* Net operating income decreased $20 million for the fourth quarter of 2005 as compared with the same period in 2004. The primary drivers were decreased current accident year results, driven by surety losses, and a loss related to significant commutations. These factors were partially offset by increased net investment income and increased earned premiums.
* Net income for the fourth quarter of 2005 decreased $58 million as compared with the same period in 2004, primarily due to the factors mentioned above and decreased net realized investment results.

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